When any investor starts investing, many factors are taken into consideration. Be it returns, investment tenure, goals etc. While these are important grounds for making the right investment, to get the right mix of investments in a portfolio and achieve the best possible results out of it, one must consider ‘Asset Allocation’!
What is Asset Allocation?
Asset allocation is nothing but ‘segregation of different asset classes and investment instruments in your investment portfolio’! There is no fix formula for right asset allocation. It all depends on your goals, risk appetite and investment tenure. Once you decide on these factors, you can rightly fix the asset classes and products of investments and decide their respective allocation in your total portfolio.
E.g Suppose, you carry low risk appetite and your goals are short to medium term , then debt allocation will be higher in your portfolio. Then as per the return potential, tenure,tax implications of the product, goals, etc you can make the asset allocation right.
Why is asset allocation important?
All investment products carry their own tax implications, risk levels and returns potential. Some are market linked too. So, this makes them volatile in nature. When you match your risk appetite, goals and investment tenure with different asset classes and products, you select the right mix of products. These products when you allocate and invest in, they perform as per their own attributes.
E.g When market is too volatile, your equity mutual funds may show negative returns, but then your investment in gold/FD/tax free bonds etc can give stable returns. Here, you balance the total risk level of the portfolio and still can make neutral returns from the portfolio.
So, to manage shocks from the volatile investments and to get best possible positive returns, one must go for right asset allocation.
Steps to make right asset allocation:
There is no set formula for the right asset allocation. To get the right one for you, you can follow some simple steps-
- Understand your risk appetite, fix your short/long term goals and decide your investment tenure.
- Then depending on the above, decide the asset allocation between main asset classes. i.g. Equity, debt, Gold, etc
- Once you decide the same, then you can screen through available investment options, say equity mutual funds, debt funds, FD, tax free bonds , NCD etc.
- Then you can short list and select the right mix based on their tenure, lock in period if any, tax implication, return potentials, etc.
- Always remember, no matter what, you must maintain the asset allocation throughout.
Investing in large no of products and investing huge money doesn’t always work; its the right asset allocation that make your money for you…!